Answer to Question #25079 in Macroeconomics for Jimmy Vo

2013-02-23T12:27:46-0500

Question #25079

What are the necessary conditions for a monopoly position in the market to be established?

Expert's answer

2013-02-26T09:19:32-0500

Monopoly is a situation, in which a single company owns all or nearly all of the market for a given type ofproduct or service. Three conditions characterize a monopolistic marketstructure. First, there is only one firm operating in the market. Second, thereare high barriers to entry. These barriers are so high that they prevent anyother firm from entering the market. Third, there are no close substitutes forthe good the monopoly firm produces. Because there are no close substitutes,the monopoly does not face any competition. Barriers to entry. A barrier to entry is anything that prevents firms fromentering a market. Many types of barriers to entry give rise to a monopolisticmarket structure. Some of the more common barriers to entry are Patents: If a firm holds a patent on a production process, it can legallyexclude other firms from using that process for a number of years. If there areno other production processes that can be used, the firm that holds the patentwill have a monopoly. Large start-up costs: In some markets, firms will face large start-up costs&mdash;forexample, the cost of building a new production facility. If these start-upcosts are large enough, most firms will be discouraged from entering themarket. Limited access to resources: A monopolistic market structure is likely to arisewhen access to resources needed for production is limited. The market fordiamonds, for example, is dominated by a single firm that owns most of theworld&#039;s diamond mines.